Essential financial tips for new entrepreneurs

Developing an idea for a new product or service and launching a new business is an exciting entrepreneurship moment. From planning out logistics to identifying your target customers, having a viable new offering to take to market is an impressive feat.

However, when becoming a new business owner, it’s essential to be clear on your finances. Understanding the best price point at which to sell your goods will make it easier to create a return on investment, and being smart about expenses and spending money on equipment and hiring a team will set you up well. 

Having a clear idea of your finances at all times will give your business more chance of succeeding. In this blog, we’ll explore why startups fail, how entrepreneurs finance a new business, how to create a financial plan and manage your cash flow, and the benefits of seeking professional financial advice.

Why do most startups fail?

In StartUp Genome’s ‘The Global Startup Ecosystem Report 2022’, it is noted that around 90% of startups fail. There are many reasons why startups fail, but data has shown that the most common reason is due to the business running out of money.

This may be due to being unable to secure funding or investment, but may also be due to high expenses and spending a lot of money on startup costs, not budgeting properly, and not planning well.

If you can’t sell your product or service, you’ll run out of money. The same is true if you target the wrong audience or don’t have a well thought out marketing strategy.

Making sure you have a good understanding of your finances, a restrained approach to spending, and a clear idea of who you’re selling to and how to target them is essential for business success.

How do entrepreneurs typically finance a new business?

There are many ways to finance a new business. Below, we explore some options.

Personal investment

Putting your own money into your new venture is quicker and easier than applying for loans or seeking out investors. You also won’t need to pay interest on any money borrowed, and won’t need to pay out part of your profits to an investor. If you put a lump sum of your own money into your business, it also signals your confidence in the business’s success - a good sign to lenders later on.

Business loans

Business loans are a useful way to get a lump sum of money upfront, and many high street banks and online lenders offer them. You will need to have a good credit score to get a good deal and a business plan to convince lenders that the money will be spent effectively. You will also then need to pay back the loan in monthly instalments with interest on top, so will need to ensure you’re making enough money to cover this.

Equity investment

This option involves selling a stake in your business in exchange for a financial investment. You won’t need to worry about paying off a loan, but investors will have a claim on your future earnings.

There are three main types of investment options on offer:

• Business angels: High net worth individuals who have the money to invest in a business.

• Venture capitalists: People who set up funds on behalf of other people to buy company shares.

• Private equity: Pools of capital where the funds come from institutional investors such as large pension funds and sovereign wealth funds.

Crowdfunding

This option enables you to ask people to send money to support your business in exchange for something, such as a share in the company or a reward. Crowdfunding is typically more successful for businesses with good growth potential or those which are offering an innovative idea.

Peer-to-peer lenders

This is a type of business loan offered by private investors through an online platform. Borrowers get better interest rates than they would with a standard loan and investors get a better rate that they’d get on a standard savings account, making it mutually beneficial.

Business grants

These don’t need to be repaid and there are hundreds across the UK on offer. Many of them target specific industries, community groups, or types of business, so eligibility criteria can be tight.

How to create a solid financial plan for your startup

Having a financial plan enables you to see where your business stands and to make informed decisions about what you can and can’t afford to spend money on.

Your financial plan should include three main financial records:

• Income statement: How your business experiences profit or loss over a specific period (usually three months).

• Balance sheet: Details your current position by including your assets, liabilities, and shareholder equity.

• Cash flow projection: Shows a schedule of how much cash is coming in and when to expect it, plus how much is going out and when costs will be paid.

How to effectively manage cash flow in your startup

Here are some tips for effective cash flow management:

• Set a startup budget so you can see how much you’re spending and where it’s going.

• Stay on top of your bookkeeping and accounting.

• Use cash flow forecasting to determine what you can expect to make.

• Cut your spending as much as possible.

• Minimise your tax return by taking advantage of corporate tax break.s

The benefits of seeking professional financial advice

Having a financial advisor when you start your own small business will help you to keep on top of your financial goals and aid in your financial decision making.

By seeking professional advice, you’ll be able to better understand the state of your business finances and well-being, whether your business expenses and expenditures are too high, and which credit card has the best interest rates. They can also help you to set up an emergency fund for when times get tough, and advise on your personal finances if you’ve invested a large chunk of your own money into the business.

There are many providers who offer short-term assistance as well as long-term advice on financial management and retirement planning. Many young entrepreneurs choose to seek financial planning tips from a professional when they start their own business as it frees them up to focus more on growing the company and getting their new product to market.

Learn essential business skills on our online MBA

If you’re thinking of beginning your entrepreneurship journey, take your knowledge of business and finance one step further by studying a 100% online MBA with Queen Margaret University.

You’ll gain a thorough grounding in all areas of the business, and will develop an in-depth understanding of finance topics such as accounting and corporate financial management.